Judge: Detroit can use bankruptcy to confront debt

A federal judge ruled Tuesday that Detroit can use bankruptcy to cut employee pensions and relieve itself of other crushing debts, handing a defeat to the city's unions and retirees and shifting the case into a delicate new phase.
AP Wire
Dec 3, 2013

Judge Steven Rhodes, who wondered aloud why the bankruptcy had not happened years ago, said pensions can be altered just like any contract because the Michigan Constitution does not offer bulletproof protection for employee benefits. But he signaled a desire for a measured approach and warned city officials that they must be prepared to defend any deep reductions.

"This once proud and prosperous city can't pay its debts. It's insolvent," Rhodes said in formally granting Detroit the largest public bankruptcy in U.S. history. "At the same time, it also has an opportunity for a fresh start."

The ruling came more than four months after Detroit filed for Chapter 9 protection.

Rhodes agreed with unions and pension funds that the city's emergency manager, Kevyn Orr, had not negotiated in good faith in the weeks ahead of the July filing, a key condition under federal law. But he said the number of creditors — more than 100,000 — and a wide array of competing interests probably made that "impossible."

Detroit "could have and should have filed for bankruptcy long before it did. Perhaps years," the judge said.

The decision set the stage for officials to confront $18 billion in debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. Orr says pension funds are short by $3.5 billion.

Rhodes promised that he would not "lightly or casually" sign off on just any cuts.

The city has argued that bankruptcy protection will allow it to help beleaguered residents who for years have tolerated slow police responses, darkened streetlights and erratic garbage pickup — a concern mentioned by the judge during a nine-day trial that ended Nov. 8.

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.

Orr praised the judge's ruling and pledged to "press ahead." He also acknowledged that pensions would be a sensitive issue because they represent a "human dimension" to the crisis, with some retirees getting by on less than $20,000 a year.

City truck mechanic Mark Clark, 53, said he may look for another job after absorbing pay cuts and higher health care costs. Now a smaller pension looms.

"Most of us didn't have too much faith in the court. ... The working class is becoming the have-nots," Clark said outside the courthouse. "I'm broke up and beat up. I'm going to pray a whole lot."

Marcia Ingram, a retired clerical worker, said she may need to find work but added: "How many folks are going to hire a 60-year-old woman?"

The judge spoke for more than an hour in a packed courtroom, reciting Detroit's proud history as the diverse, hard-working Motor City devoted to auto manufacturing. But he then tallied a list of warts: double-digit unemployment, catastrophic debt deals, thousands of vacant homes and wave after wave of population loss.

Behind closed doors, mediators led by another judge have been meeting with Orr's team and creditors for weeks to explore possible settlements.

Rhodes has told the city to come up with a plan by March 1 to exit bankruptcy. Orr has said he would like to have one ready weeks earlier.

The city is so desperate for money that it may consider auctioning off masterpieces from the Detroit Institute of Arts and selling a water department that serves much of southeastern Michigan.

"We need to recognize that this decision is a call to action," Gov. Rick Snyder, who supported the bankruptcy filing, said Tuesday. "We are confronting fiscal realities that have been ignored for too long."

Minutes after the ruling, a union lawyer said she would appeal. City officials got "absolutely everything" in Rhodes' decision, she told reporters.

"It's a huge loss for the city of Detroit," said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half of city workers.

Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. By July, Orr and Snyder decided bankruptcy was Detroit's best option.

Detroit, a manufacturing hub that offered well-paying blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million people since then. With more square mileage than Manhattan, Boston and San Francisco combined, the city does not have enough tax revenue to reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat.

Donors have written checks for new police cars and ambulances. A new agency has been created to revive tens of thousands of streetlights that are dim or simply broken after years of vandalism and mismanagement.

Former hospital executive Mike Duggan takes over as mayor in January, the third mayor since Kwame Kilpatrick quit in a scandal in 2008 and the first white mayor in largely black Detroit since the 1970s.

Orr is in charge at least through next fall, although he's expected to give Duggan more of a role at city hall than the current mayor, Dave Bing, who has little influence in daily operations.

Comments

Lanivan

In the 50's, GM was the largest employer in the US. Today it's Walmart. Case closed.

LessThanAmused

Amen.

Vladtheimp

Since 1962 Detroit has been governed by Democrats - dots - connect.

Lanivan

I think these dots make a more persuasive connection:

.1963 - Honda produced it's first car.

.1980 - Japan surpassed the US as #1 in auto manufacturing.

.1984 - Toyota opened NUMMI - the 1st joint venture plant in the US with GM.

.2008 - Toyota surpasses GM as the world's largest manufacturer.

Vladtheimp

So it's those darned Asians that drove Detroit into the wasteland it is today - how politically correct of you. I guess those godless heathens are equally responsible for the bankruptcies of San Bernardino, Calif., Stockton, Calif., Jefferson County, Ala.,and Central Falls, R.I. - or are there some similar dots that a forensic centrist like you can connect?

Lanivan

A comprehensive argument regarding the causes of Detroit's woes must contain the powerful influences of the Japanese auto industry - it is what makes Detroit's bankruptcy unique as well as acutely distressing. Because the erosion of US manufacturing, the weakening of the middle class and the American Dream, and the explosion of global competition are part of the pain, in addition to the financial mismanagement of elected officials, blaming Democrats only seems a little silly, doesn't it?

What is godless is the link between the bankruptcies you list - and that is the possible crumbling of the inviolability of public pensions that the Detroit bankruptcy ruling might trigger. What a mess.

Vladtheimp

Heaven forfend that the American car companies and the UAW were subjected to real competition from the Japanese, who just happened to make better cars than what Detroit and Lee Iacocca were turning out. Gremlin - nuff said.

Although I feel for anyone taking a haircut because of Government mismanagement, it must be noted that due to the incestuous relationship between public sector unions and the Democrat party, those union members are the ones that kept voting for the public officials who ruined Detroit. For them to complain now is the equivalent of the kid who killed his parents and begged for the mercy of the court because he's and orphan.

Lanivan

Another point to make is that the Detroit bankruptcy is unique in that it mirrors the link between American culture and US car manufacturing philosophy during those Golden Years - which was that when things were good, and in Detroit's case, they were very good, throw all caution to the wind. Don't sweat the details. Waste in manufacturing? Throw it away and start over. Excess revenue? Promise a living wage, benefits, and pension and then some. It was a heady, superior time in US history when the US seemed infallible and impervious to outside forces, a hybrid of Manifest Destiny. And it was embraced by Republicans and Democrats alike.

A great, iconic book to read is 'The Automobile Age', James J. Flink. He writes about the creation of Detroit as the mecca of the world's first auto culture, the development of automotive technologies, and an analysis of the 'automobility' that shaped American culture.

Vladtheimp

Much truth in both of your insightful comments. I note that " Promise a living wage, benefits, and pension and then some" has been the motto for Detroit and its public sector unions even when there was no revenue.

Lanivan

Another thought is that recessions in the 50's-80's were created, in large part, by US manufacturing inventory cycles - too much, too little. This management philosophy of under-producing and over-producing led to continual lay-offs, recessions, and instability, which then became the major driver of union demands during those years. Riding the wave of enormous profits, post-war manufacturing superiority, and the insatiable US car culture, management and union symbiosis was inevitable.

Easy to forget, when recessions today are almost always financial-driven.

Tri-cities realist

While I don't disagree with your chronology, there is more to the story. One man, W. Edwards Deming, played a crucial role in the growth of the Japanese automakers. US automakers were aware of him, but largely ignored him until the 80's, likely due to arrogance of the US OEM's management (and the fact that Deming blamed 85% of problems on management, and only 15% on the workers). While many in the US have disdain for Deming since he helped the Japanese automakers, I don't blame the man for helping those that would listen to him.

And to be fair, a comprehensive look at Detroit's financial woes can not overlook the decisions made by city officials, who just happened to be Democrats.

Lanivan

Dr. Deming was a pioneer in statistical quality control, and his work really shook up US manufacturing - eventually. His seminal work that quality control should be the basis throughout the manufacturing structure really lent itself to the Asian culture of focusing on the details, sweating the small stuff, working out the bugs over and over until the problem was solved. US car manufacturers were after the Home Run, the next exciting new model, the enormous profits that were flowing into Detroit.

In Ryuji Fukuda's book, Managerial Engineering,he writes: "Strangely enough, our efforts were stimulated by a misunderstanding. We thought that the concepts being taught were to us Dr. Deming were actually practiced by American firms. Without realizing the differences between research and practice, and between top-level companies and average companies, we made every effort to catch up with what was, in fact, an illusion."

Fascinating! Dr. Deming was absolutely correct to blame management, for it was the US managerial philosophy at the time, artificial as it was eventually revealed to be, that ultimately triggered the weakening of it and Detroit's standing in the world. They sat up and smelled the coffee, but only when their backs were up against the wall, and Japan was making inroads.

Tri-cities realist

So out of curiosity, were you familiar with Deming prior to my comment, perhaps due to your vocation? Or did you just google him? I'm really not trying to be condescending, but he was a pioneer with much more than just "statistical quality control", which sounds very 1980's to those in the trade. His PDCA (or PDSA) which he correctly credits to his mentor Shewhart, was perhaps more influential, although just my personal opinion. An interesting man nonetheless, especially when considering his relationship with Taguchi, and what the 2 contributed to quality, continuous improvement, lean, etc. and how it has transformed manufacturing around the world, although some live the stuff, while others go through the motions. I think I was born too late, Bell Labs in the middle to later 1900's would have been an interesting place to work.

Lanivan

I've been familiar with Deming and Juran, statistical process control,(Six Sigma), and their work with the Japanese for a long time now. It was fun to see you pick up on my Japanese automaker chronology with your mention of Deming, and the link between strides in organizational development, statistical quality control, US and Japanese carmakers, US car culture, and ultimately, the rise and fall of Detroit. (It also was a pleasant respite to Obamacare!)

I'd like to point out that much of the Deming/Juran/Shainin (and many others) work was supported and encouraged by a slew of post-WWII government-sponsored programs, where they hired community leaders and educators (MIT) to facilitate studies and training in organizational development and the quality assurance gospel of Deming/Juran. Emphasis on the partnership between government, education, and business!

It's interesting to me that US automakers only became seriously invested in quality control when the Japanese started making inroads in US markets, and how it highlights the Detroit/car culture mentality.

Dr. Juran once said, "I have recommended quality control in the US and in other countries, but it was only Japan that practiced my idea immediately."

Tri-cities realist

Just when I thought we could have a conversation about something other than govt, you infer that his, and others' work might not have happened without govt sponsored programs. Ugh. Have you ever met a govt program you didn't like?

Lanivan

Your choice, kemosabe, to hone in on my factual and unbiased comment regarding the very important post-WWII government collaboration with researchers. A true quality control aficionado would recognize and acknowledge this historical aspect. And your inference that I was suggesting that Deming/Juran's work wouldn't have happened without govt sponsored programs is weird, his research beginning in the late 20's at Bell Labs, as you know. But I also note he did work for the US government for a time.

Yes - silly pork barrel projects like the ones Gov Sarah Palin advocated for - "While running for governor in 2006, though, Palin backed federal funding for the infamous bridge, which McCain helped make a symbol of pork barrel excess.

And as mayor of the small town of Wasilla from 1996 to 2002, Palin also hired a Washington lobbying firm that helped secure $8 million in congressionally directed spending projects, known as earmarks, according to public spending records compiled by the watchdog group Citizens Against Government Waste and lobbying documents."

Tri-cities realist

Perhaps my inference was stronger than I intended, which is why I included the word "might". Anyway, at least we agree on the earmarks. Are there any bad earmarks advocated by democrats, or only republicans? Hi-O-Silver!

Barry Soetoro

Three short sentences with no mention of political affiliation? I feel let down for some strange reason....

Mystic Michael

It is incredibly unjust to expect Detroit's public union retirees to pay a penalty for this mess. Many of them faithfully served the city for up to 30 years, regularly sacrificing a portion of their earnings as a contribution to their own pensions, fully expecting the city to keep its word to match those funds - dollar for dollar. Many of those people had expected to receive as little as $19,000 a year in pension pay. Now they're being told to expect even less than that.

While there's been more than enough fiscal mismanagement in Detroit city government, the state of Michigan must shoulder its share of the blame as well - including Governor Snyder's refusal to distribute Detroit's fair share of federal block grant funds, as just one example of state malfeasance.

Tri-cities realist

Perhaps people should learn NOT to trust govt entities, be it city, state, or federal with their money, especially their retirement.

Mystic Michael

And perhaps entrusting it to Wall Street is safer and more secure? How very facile of you...

Tri-cities realist

My suggestion is to let the individual decide where to invest it: with govt, Wall Street, local bank, tin can buried in the back yard, whatever they choose. And the tin can isn't looking so bad for them. But if you want to compare rates of return between govt pension plans, and 401(k)'s bring it on.

iamchristine999

I agree that the state had a huge part in pushing Detroit's privatization. Read the"Devos...The Detroit Bankruptcy that shows the emergency manager law and the emergency manager is representing Bank of America for it's interest payments. They called the loan because credit rating lowered thanks to Snyder not giving Detroit their money. Now they get to steal all of Detroit's assets. The so called debt is inflated and this is just a scam by Wall Street to take over a city's assets in conjunction with Snyder.

truthhurts

Detroit got what it deserved for its mis-management. What do the unions whiners want...another bail out?

Wolverine49457

So many people had their fingers in the pie it was bound to happen, I don't feel much of it's the fault of competition although other automakers made huge strides in quality and affordability about the time Detroit stumbled flat footed to produce cars people wanted during the late 70’s and 80’s (remember the “K” cars and Mercur?) In the end the fault lays in Detroit; corruption, greed, avarice and the lust for power are at the roots of this. I suspect those at the top who had much to do with engineering the downfall of a city and its industrial might will do just fine...sorry little people but elections have consequences even within the brotherhood of a Union or the leadership of a city. Elect a thief and he will steal, elect a liar and he will tell you pretty sounding lies, elect a socialist and he will centralize power and take away your voice...you brought this on yourselves and although it can bring an end to decades of graft and social peril know it will be painful.

Say no to new taxes

Their employer is broke, what part of that don't they understand? Ask a steel worker or airline employee or auto assembly worker and ask them what it feels like to get their pension cut. All you read about is that the average city employee "only collects $30,000 per year in pension" Do you anyone collecting that much on social security? Many of these people retired in their early fifties and have been collecting pensions for over 30 years, the sum of which greatly exceeded what they made during their working career. The answer? Put all government employees into social security with the option to also have a self managed 401K. That would eliminate any future obligation to them after retirement.

Woodrow

Wolverine 49457 has hit the nail on the head. To add- bankruptcy will not save Detroit. There is little money, and there will be less in the future. No people want to move to Detroit. No businesses want to move to Detroit. It is a violent hell hole populated by violent Blacks. That will not change. History has shown that that the Black community is not capable of reform and will not take responsibility for its own actions.

Detroit has sewn the wind and will reap the whirlwind. Turn out the lights. The party's over.

Mystic Michael

Here we go with the race baiting again. Your white sheet and your pointy hood are hung up in the closet, waiting for you Woodrow.

Hoofhearted

Hey Mystic Michael let's see you walk through a neighborhood in Detroit at night sometime. Your talk is cheap. Or let's keep it close have you do that in Muskegon Heights.

Hoofhearted

I hope the Lions can get a bailout and even if they lose in the playoffs just let them play in the super bowl and let them win.

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